Working Papers, Jerome Levy Economics Institute 94
This paper examines the relationship between real wages in the United States and productivity. The measure of productivity includes the impact of public capital as well as private capital. Both neo-classical and Keynesian theories predict that real wages increase with increases in the capital stock and technical progress, and move inversely over business cycles. However, the question of whether real wages are cyclical or countercyclical has not been confirmed by empirical studies. These studies, however, ignore the impact of public capital on productivity. Using Cobb-Douglas production function estimates, this paper incorporates the impact of public capital on productivity and real wage. The results indicate that when the capital stock is controlled for, real wage is countercyclical, and validate diminishing returns to labor, positive returns to public capital and a procyclical effect of capacity utilization on real wage. Addressing stationarity concerns, estimates from the productivity equation establish a long-run relationship between productivity, measured as output per unit of capital, and employment to capital ratio, and the public capital to private capital ratio. Estimates from the real wage equation indicate that a long-run relationship exists between real wage and labor productivity and the public to private capital ratio. Using the statistical estimates herein, if the public capital stock had remained at the historical 1948-1965 ratio, rather than declining, productivity would have been between 2.4 and 2.9 percentage points higher and real wages would have been between 2 to 2.8 percentage points higher, ceteris paribus. These projections translate into a potential increase in gnp per capita and a higher, rather than stagnating, standard of living.
Productivity Private and Public Capital and Real Wage in the United States 1948 - 1990